Can a Cryptocurrency Self-Regulatory Organization Work? Assessing Its Promise and Likely Challenges

The U.S. regulatory framework for cryptocurrency (including federal securities compliance,[1] spot exchange registration,[2] and new derivative product listings[3]) continues to slowly evolve as government agencies increase their familiarity with the technology and dissect its associated risks.[4]  Nevertheless, despite recent guidance statements issued by the Securities & Exchange Commission (SEC); the Commodity Futures Trading Commission (CFTC); and the self-regulatory organization (SRO), Financial Industry Regulatory Authority (FINRA),[5] regulatory opacity and inter-agency jurisdictional uncertainty in this market continues to frustrate many legal practitioners.[6]  One proposal to the regulatory limbo, currently making its rounds amongst industry stakeholders, is the idea of a U.S. cryptocurrency “self-regulatory organization” (CSRO).[7] Gemini Exchange founders Cameron and Tyler Winklevoss (who turned their Facebook settlement into Bitcoin billions)[8] initially advanced such a proposal in March 2018,[9] spurred on perhaps by the SEC denying their Bitcoin exchange traded fund application (the Winklevoss Bitcoin Trust)[10] due to concerns over the potential for Bitcoin manipulation and fraud.[11]  The idea of cryptocurrency self-regulation has become even more pressing in light of recently published studies alleging that the cryptocurrency Tether[12] was used during Bitcoin’s historic 2017 price run to “stabilize and manipulate Bitcoin prices”[13] as well as the continuing question of investor risk when using cryptocurrency exchange platforms in light of frequent cyber-hacks and data breaches.[14]

In many regards, the conceptual idea of a CSRO is a welcome development in this nascent market since it may lead to greater certainty, legitimacy, stabilization, and increased public trust.  Also, there is support for the idea that the industry itself, given its technical expertise relative to regulators, is best suited to enact governing measures, and that such a step will have positive global ramifications and potentially reduce regulatory arbitrage.  However, there are critical design features when considering a potential CSRO that will impact its effectiveness.  This article will explore such considerations.  Further, there are lingering questions, given the U.S.’s overall experience with financial market self-regulatory bodies in general, about the effectiveness of SROs in curtailing bad actors and strengthening markets.  These uncertainties, including classic economic problems like organizing “the commons” and dealing with free-riders, as well as practical and legal considerations like ensuring CSRO accountability, enforcing non-compliance penalties, facilitating government oversight, creating suitable member incentives to participate, and ensuring a high cost of expulsion, will surely surround any CSRO genesis.  This article will touch on these critiques as applied to multiple CSRO proposed frameworks.

The Details of the Gemini CSRO Proposal

The Gemini Proposal, in principle, looks to “provide additional oversight to the virtual commodity cash market” by modelling the approach taken by the National Futures Association (NFA)[15] – the SRO for the U.S. derivatives industry – in relation to the CFTC.[16]  As a preliminary matter, it appropriately identifies the definitional conflation that can unfortunately plague the term “cryptocurrency”, and notes that definitional clarity is a prerequisite to avoiding regulatory jurisdictional overlap.[17]  In seeking classification precision, the proposed CSRO (the Virtual Commodity Association (VCA)) focuses on consumer protection and integrity in the “cash market for virtual commodities” rather than the “security token” market (which, in any event, would fall under SEC jurisdiction) because the cryptocurrency market: is still developing, is driven by speculation, includes many stakeholders, and exhibits low transaction costs.[18] Also, despite FINRA’s prioritization of cryptocurrency in its 2018 Annual Regulatory Examination Priorities Letter,[19] and its past issuance of investor cautions concerning cryptocurrency fraud,[20] the Gemini CSRO would purportedly cover an existing self-regulatory gap in the virtual currency spot market.[21]

The VCA would be non-profit, independent (not a trade organization) and “be in compliance with global standards and best practices for SROs.”[22] In addition to “sound practices” compliance, the proposed VCA would also seek to promote “price discovery, efficiency, and transparency” while providing incentives for “the detection and deterrence of manipulative and fraudulent acts and practices.”[23] In fulfilling this mandate, the VCA would also include a board of directors structure, openly interact with and inform regulators, and conduct “periodic examinations of members” (members would include “virtual commodity platforms”, “over-the-counter trading firms” and “other trading facilities”).[24]  Further, the VCA would impose “agreed upon sanctions” on non-complying members.[25]  Although not explicitly stated, the proposal implies a voluntary structure that would be enforced through contractual agreements.

Yes, There is Conceptual Support for a CSRO – But Will it Work?

A commonly advanced argument in favor of a CSRO is that the industry (and those participating in it) best understand cryptocurrency and the technology underpinning it, and therefore are much better suited (and possess the requisite skin in the game) to effectively regulate it.[26]  This line of thought suggests that deferring the regulatory burden to “otherwise well-meaning” government agencies (who possess a limited understanding of the technology itself) will create “confusing or competitive regulation” with resulting adverse impacts on the industry.[27] In other words, a CSRO may provide regulatory design support so that the “development of the nascent crypto ecosystem does not take place in a haphazard manner,” while at the same time building consumer trust and reducing the regulatory cost burden.[28] It can also reduce the potential for burdensome regulation as a knee-jerk reaction to high profile fraud cases.[29]  Further, it allows for a continuing dialogue between industry stakeholders and regulators to ensure effective laws are created in due course.[30]

Professor Saule Omarova has been an advocate of the “informational advantage” argument in favour of industry self-regulation especially when dealing with “complex financial markets and activities” (of which cryptocurrency and its derivative products would surely fit).[31] Omarova has stated that the “other potential advantage of private industry actors over government regulators is their ability to monitor and regulate their own business operations on a truly global basis, without regard to national borders and jurisdictional limitations”[32] and that self-regulation has a greater measure of “flexibility” and is also more “context-driven.”[33] It should also be noted that some commentators believe that SROs, in general, serve an important “political” function – especially in light of agency regulatory overlap.[34] When regulation is difficult to enact for political reasons, SROs may constitute a viable “substitute” and may also facilitate “alliances where there is no supranational framework to provide guidance or regulatory authority.”[35]

There is support for the idea of a CSRO from members of the U.S. financial regulatory community.[36] CFTC Commissioner Brian Quintenz, who has been at the forefront of several regulatory discussions about cryptocurrency and financial technology generally, recently stated that a CSRO could “spur the development of standards around cybersecurity policies, data retention, protection of customer accounts, trading practices and other issues.”[37] Perhaps one of the most compelling arguments in favour of a CSRO is that it could serve as a remedy to what Quintenz identifies as “the gap between the status quo and future government regulatory action” as applied to cryptocurrency.[38] SROs help mitigate the problems of regulatory delay (since agencies are reluctant to make mistakes in the oversight structures of nascent technologies), and the continuing problems of jurisdictional overlap, definitional “ambiguity” (particularly relevant in the case of Bitcoin)[39] and “agency coordination.”[40] Other proponents of a CSRO advocate that it would provide educational value to regulatory agencies throughout the world[41] and would create a way for regulators to “test the waters ahead of clearer regulatory frameworks.”[42]  Also, there is some economic evidence that SRO participants comply with self-organized rules due to the reputational risk of non-compliance and a “first mover advantage” since it may facilitate “process upgrades” at self-complying firms, thus enhancing their competitive position relative to other firms in the marketplace.[43]

Not Necessarily a Regulatory Panacea: Identifying CSRO Drawbacks and Uncertainties

A CSRO may not be the regulatory panacea that some think.  While an SRO can use industry expertise to create enhanced standards and better compliance, some legal commentators question their actual effectiveness and wonder, particularly in the United States, whether they are merely a regulatory “façade.”[44]  The main challenge obstacles in allowing cryptocurrency firms to self-regulate is trust.  The cryptocurrency debate (including its use value and long-term viability) is polarized, and the technology has long been considered a safe haven for criminal enterprise.[45] Therefore, some sceptics doubt the motivation that cryptocurrency firms have to regulate themselves in the public’s interest.  Similar critiques regarding SRO “conflicts of interest” have been levied towards all types of self-regulatory structures.[46]

SROs have shown vulnerability to scandal in the past[47] and have been cited as lacking accountability and sidestepping regulatory input (a criticism that has been specifically directed towards FINRA).[48]  Another criticism is that SROs can give rise to “anti-competitive or collusive practices at the expense of customers.”[49]

The effectiveness of an SRO is contextual on such factors as: “market history, business culture and legal system.”[50] Accordingly, a CSRO may be a tenuous proposition given the nascent and volatile cryptocurrency market, the largely libertarian and anti-authoritarian business culture, and the uncertain (and constantly evolving) legal framework that governs it.  Further, it has been suggested by one economic study that self-regulated systems can lead to “free-riding,” “principal-agent,” and “moral-hazard” challenges “when institutional arrangements do not provide adequate mechanisms for monitoring and enforcement of rules.”[51]  Without a strong Congressional mandate, and viable enforcement teeth, a CSRO could easily fall victim to free-riding and principal-agent concerns.

Bloomberg Law writer Lydia Beyoud has identified several frictions that stand in the way of effective cryptocurrency self-regulation, including industry balkanization, competing ideologies, and fragmented leadership initiatives.[52]  For example, the details on CSRO organizational oversight on issues ranging from membership and qualification assessment, to penalties, sanctions, and “regulatory oversight,” remain cloudy at the moment.[53] Although not a per se impediment to the creation of a CSRO, a narrowly defined self-regulatory mandate may also leave unsatisfactory oversight gaps.  This is a critique that could be levied directly at the Gemini proposal; by focusing only on virtual currency cash markets, the other cryptocurrency industry segments remain subject to the above-mentioned frustrations of regulatory delay, lack of expertise, and high regulatory costs. Another valid critique of a CSRO at this stage of the industry’s evolution, levied recently by CFTC commissioner Rostin Behnam, is that without a “congressional mandate” (such as those preceding the formation of FINRA and the NFA) a resulting voluntary CSRO may lack enforcement strength and ultimately be ineffective.[54] Further, if the CSRO were to address any systemic risk dynamics it would need to, as Professor Steven Schwarcz has described, “operate in the shadow of government regulation”[55] – and an obvious problem, which drives CSRO demand in the first place, is a lack of clear regulation.

Others critics have questioned the viability of a near-term sophisticated self-regulatory oversight structure like FINRA, given the short-tenure of digital currency exchanges (compared to the lengthy history of pre-FINRA stock exchange self-regulatory operations through the National Association of Securities Dealers and the New York Stock Exchange).[56] This factor however, doesn’t preclude the creation of a “standard-setting body” like the NFA (which is the model of the Gemini Proposal) or the creation of an “expert” or “advisory committee” that could be comprised of regulators, exchange representatives, lobbyists and other cryptocurrency industry stakeholders.[57]

Professor Jonathan Macey and Caroline Novograd have advanced a “market power” theory of SRO effectiveness and have argued that, in addition to being in a profitable industry, “SROs such as FINRA, in order to enforce their own rules must have and maintain market power over the industry they are regulating.”[58]  The authors assert that the inverse to this proposition is also true in that “if profitability or market power declines, self-regulation will fail.”[59] In support of this theory is the case of FINRA, which lacks “explicit statutory authorization to bring private rights of actions” in regards to its penalties.[60]  Nevertheless, if, as the authors describe, there are “economic rents (super-competitive profits)” to be derived from being part of a self-regulated industry, and being expelled from the industry (because of non-compliance) represents a real (threatened) cost, then the SRO, even without government sanctioned enforcement power can use “their credible threat to be able to exclude a participating firm from the cartel as its ultimate enforcement mechanism.”[61] A “market power” theory when applied to a CSRO leaves us with many enforcement, and general effectiveness, uncertainties since non-compliance may not be that costly, at least at this stage of market development, for cryptocurrency firms, and they may prefer expulsion to paying fines.[62]

Can we Learn Anything from Japan’s CSRO Experience?

The United States is not the first country to consider a CSRO.[63]  Japan, which has taken a more accommodative approach to cryptocurrency, recently instituted a self-regulatory organization for its virtual currency industry.[64] This comes on the heels of a massive hack in January of this year at the Tokyo-based cryptocurrency exchange Coincheck – which resulted in a loss of over US$530 million worth of XEM tokens (the cryptocurrency of the NEM[65] Foundation).[66]  The mandate of Japan’s CSRO – known as the Japanese Cryptocurrency Exchange Association (JCEA), and consisting of 16 cryptocurrency exchanges registered with Japan’s Financial Services Agency[67] – is to create “best practices and compliance standards” and also advise unlicensed[68] cryptocurrency exchanges.[69]  However, the nascent formation of the CSRO makes it difficult to assess its policing success (other than perhaps a general trust-seeking signal to the public that the industry is vested in a healthy market ecosystem and stamping out cases of fraud and manipulation).

A Solution to a CSRO Tragedy of the Commons? The “Token-Curated Registry” Concept

The Gemini Proposal is not the only SRO development on the cryptocurrency horizon. As reported in Davis Polk’s March 2018 Blockchain Bulletin, the idea of a “token-curated registry” (TCR), which is a non-statutory “cooperative” self-regulatory body where members “vote to include new participants, set standards, and share in the costs and rewards of running the registry” is starting to gain traction in the technology community.[70]  Supporters of the TCR concept have subsequently spawned Messari[71] – which is described by Davis Polk as an “open source EDGAR-type database for digital assets.”[72] Under a TCR model, Messari works in concert with a decentralized Swiss-based SRO called ICO Governance Foundation[73](“IGF”) to list registered ICO tokens.[74]  IGF would in turn “maintain an open voluntary public filing and registration protocol called Form IGF-1 as well as a public registration database that performs automated collection, validation, indexing, acceptance, and forwarding of submissions” and would also liaise with national regulators to “establish global best-practices and standards for ICOs that complement national regulatory organizations.”[75]

The TCR is an intriguing possibility as it might, as Messari Founder Ryan Selkis acknowledges, solve the classic “tragedy of the commons”[76] problem that seems somewhat inevitable when contemplating a CSRO since, unlike FINRA or the NFA, there isn’t a single U.S. regulator that can give a CSRO a “critical mandate” (thus it would lack full enforcement jurisdiction) and the questions of cost and ongoing leadership are uncertain.[77] According to Selkis, the TCR would have an “intrinsic value to inclusion” therefore ICO developers would willingly pay a fee to be included (similar to the way that public companies pay for EDGAR filings).[78]  This value proposition depends however on a “high-quality” perception of the list itself (a point that Selkis acknowledges, but it’s nevertheless an untested proposition given the fragmented nature of the cryptocurrency community).[79] Further, it is uncertain whether a critical mass of fee revenue could be generated to support a TCR over a prolonged term, especially in the light of what might to be a current ICO market bubble.

Conclusion: CSRO Design Factors to Ensure Continuing Viability

If a CSRO materializes in the near future there are several design components that are necessary to ensure continuing viability, including: support from industry and government (notably the SEC and the CFTC), expansive mechanisms for fraud and other misconduct detection, and credible ways to ensure member accountability and penalty enforcement.[80] Another important consideration is whether the CSRO is a voluntary structure or is “legally-mandated,” as the legal underpinnings of the self-regulatory structure affects its penalty enforcement strength and available options.[81]  The other obvious problem with voluntary structures is that they can facilitate a self-selection bias where bad actors (those most likely to breach codes of conduct) choose not to join altogether.[82]  Other design considerations include mechanisms to ensure member commitment, transparency, government oversight, economic viability (suitable funding structures), and processes to ensure public engagement and trust.[83]

Another dynamic, as discussed above, is defining the scope of self-regulatory oversight so as to minimize, to the largest extent, supervisory gaps – or alternatively the creation of multiple CSROs to fill the gaps resulting from narrow definitional mandates (although the latter suggestion would surely be subject to the “market power” critique previously mentioned and may not provide a large enough benefit to make expulsion a credible threat).

One wonders whether a diverse and fragmented CSRO environment will ultimately be ineffective (or even survive for that matter), thus supporting the skeptical view that without regulatory teeth the CSRO idea will remain conceptual.  Also, in order to tip the scales of CSRO member cost-benefit analysis in favor of compliance with rules and paying penalties over expulsion – no matter what framework is ultimately enacted –  there needs to be mechanisms in place to ensure that the threat of expulsion is a costly proposition.[84]  For example, being expelled from a CSRO for material non-compliance or the non-payment of fines renders individuals ineligible for greater industry participation[85] (although without statutory authority this would likely be impossible). In any event, effective regulation is often a “multi-layered process”[86] and any measure of self-regulation at this stage, which can evolve over time to be more effective and respond to new challenges, is a potentially stabilizing measure in an otherwise volatile market.

 

 

 

[1] See U.S. Securities and Exchange Commission, Statement on Cryptocurrencies and Initial Coin Offerings (December 11, 2017), https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11.

[2] See U.S. Securities and Exchange Commission, Statement on Potentially Unlawful Online Platforms for Trading Digital Assets (March 7, 2018), https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading; See also Ana Alexandre, US: Cryptocurrency Trading Platforms Must Be Registered With SEC, Cointelegraph (March 7, 2018), https://cointelegraph.com/news/us-cryptocurrency-trading-platforms-must-be-registered-with-sec.

[3] See Lydia Beyoud, CFTC Issues Guidance For New Crypto Derivatives Listings, Bloomberg BNA (May 22, 2018), https://www.bna.com/cftc-issues-guidance-n57982092816/; see also Gregory Lisa, CFTC issues guidance for virtual currency products, Lexology (May 31, 2018), https://www.lexology.com/library/detail.aspx?g=b47df549-9130-405e-868a-ce2b4c7de1dd.

[4] See Michael del Castillo, U.S. Cryptocurrency Regulators Show Lawyers A United Front, Forbes (June 7, 2018), https://www.forbes.com/sites/michaeldelcastillo/2018/06/07/us-cryptocurrency-regulators-show-unified-front-to-new-york-city-bar-lawyers/#124999283d4d.

[5] See Financial Industry Regulatory Authority, About FINRA, https://www.finra.org/about (last visited June 19, 2018).

[6] See del Castillo, supra note 4.

[7] See Wolfie Zhao, Crypto Self-Governance Touted as Solution To Regulatory ‘Mess’, Coindesk (May 14, 2018), https://www.coindesk.com/crypto-self-governance-touted-as-solution-to-regulatory-mess/.

[8] See Chris Morris, Winklevoss Twins Used Facebook Payout To Become Bitcoin Billionaires, Fortune (December 4, 2017), http://fortune.com/2017/12/04/winklevoss-twins-bitcoin-billionaires/.

[9] See Cameron & Tyler Winklevoss, A Proposal For A Self-Regulatory Organization for the U.S. Virtual Currency Industry, Medium (March 13, 2018), https://medium.com/gemini/a-proposal-for-a-self-regulatory-organization-for-the-u-s-virtual-currency-industry-79e4d7891cfc (hereinafter the “Gemini Proposal”).

[10] See Jeff John Roberts, Bitcoin Price Plunges as SEC Rejects Proposal to Create an ETF, Fortune (March 10, 2017), http://fortune.com/2017/03/10/sec-bitcoin-etf/.

[11] See U.S. Securities and Exchange Commission, Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, to BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, to List and Trade Shares Issued by the Winklevoss Bitcoin Trust (March 10, 2017), available at https://www.sec.gov/rules/sro/batsbzx/2017/34-80206.pdf.

[12] See Tether, https://tether.to (last visited June 19, 2018).

[13] See Matt Robinson & Matthew Leising, Tether Used to Manipulate Price of Bitcoin During 2017 Peak: New Study, Bloomberg (June 13, 2018), https://www.bloomberg.com/amp/news/articles/2018-06-13/professor-who-rang-vix-alarm-says-tether-used-to-boost-bitcoin?__twitter_impression=true.

[14] See Evelyn Chang, New York wants cryptocurrency exchanges to explain themselves; Winklevoss says he’ll comply, cnbc (April 17, 2018), https://www.cnbc.com/2018/04/17/new-york-wants-cryptocurrency-exchanges-to-explain-themselves-winklevoss-says-hell-comply.html.

[15] See National Futures Association, https://www.nfa.futures.org (last visited June 15, 2018).

[16] See Gemini Proposal, supra note 9.

[17] Id.

[18] Id.

[19] See Financial Industry Regulatory Authority, 2018 Annual Regulatory and Examination Priorities Letter (January 2018), available at http://www.finra.org/sites/default/files/2018-regulatory-and-examination-priorities-letter.pdf.

[20] See Nossaman LLP, FINRA Prioritizes Cryptocurrency Regulation in 2018, JDSupra (January 22, 2018), https://www.jdsupra.com/legalnews/finra-prioritizes-cryptocurrency-53639/.

[21] See generally Gemini Proposal, supra note 9.

[22] Id. The “sound practices” mentioned in the proposal include “responsible financial management”, “transparency; conflicts of interest”, “rules based markets”, “cyber and information security; recordkeeping”, “surveillance”, “information sharing”, “cooperation with regulators”, and “legal analysis.”

[23] Id.

[24] Id.

[25] Id.

[26] See Joe Ciccolo, The Case For A Self-Regulatory Cryptocurrency Group In The U.S., BitAML (March 15, 2018), https://bitaml.com/the-case-for-a-self-regulatory-cryptocurrency-group-in-the-u-s/.

[27] Id.

[28] Rakesh Sharma, Should Cryptocurrency Exchanges Self-Regulate? Investopedia (February 13, 2018), https://www.investopedia.com/news/should-cryptocurrency-exchanges-selfregulate-themselves/.

[29] See Alexander Larsen, Here’s How Self-Regulation Could Reinvigorate The Cryptocurrency Boom, Lawyer Monthly (May 9, 2018), https://www.lawyer-monthly.com/2018/05/heres-how-self-regulation-could-reinvigorate-the-cryptocurrency-boom/.

[30] See id.

[31] See Saule T. Omarova, Rethinking the Future of Self-Regulation in the Financial Industry, 35(3) Brook. J. Int’l L. 665, 670 (2010).

[32] Id.

[33] Id. at 674.

[34] See generally Thomas A. Russo & Marlisa Vinciguerra, Financial Innovation and Uncertain Regulation: Selected Issues Regarding New Product Development, 69 Tex. L. Rev. 1431, 1486 (1991).

[35] See Cally Jordan and Pamela Hughes, Which Way for Market Institutions: The Fundamental Question of Self-Regulation, 4 Berkeley Bus. L.J. 205, 218 (2007) (“In some cases, self-regulation may act as a substitute where political factors impede government regulation; Canada’s political inability to create a federal securities regulator has meant that a number of other entities, some endowed with self-regulatory authority, have stepped into the breach (TSX, Market Regulation Services Inc., Investment Dealers Association of Canada and Canadian Securities Administrators)”).

[36] See Annaliese Milano, CFTC Official Backs Winklevoss Crypto Self-Regulation Bid, Coindesk (March 13, 2018), https://www.coindesk.com/cftc-official-backs-winklevoss-brothers-crypto-self-regulation-bid/.

[37] Roger Aitken, U.S. CFTC Commissioner Says Cryptocurrency Exchanges Adopting ‘Self-Regulation’ Could Spur Standards, Forbes (February 15, 2018), https://www.forbes.com/sites/rogeraitken/2018/02/15/u-s-cftc-commissioner-says-cryptocurrency-exchanges-adopting-self-regulation-could-spur-standards/#11f5180645e1.

[38] Annaliese Milano, Crypto Industry Should Self Regulate, Says CFTC Commissioner, Coindesk (March 8, 2018), https://www.coindesk.com/crypto-industry-should-self-regulate-says-cftc-commissioner/

[39] See CoinTelegraph, US Regulators Debate Whether Bitcoin is Commodity or Security, CoinTelegraph (October 19, 2017), https://cointelegraph.com/news/us-regulators-debate-whether-bitcoin-is-commodity-or-security.

[40] See Milano, supra note 38.

[41] Id.

[42] Zhao, supra note 7.

[43] See generally Michael Porter, The Competitive Advantage of Nations (1^st ed. 1990).

[44] See Jordan & Hughes, supra note 35 at 223.

[45] See Aatif Sulleyman, Bitcoin Price Is So High Because Criminals Are Using It For Illegal Trades, Research Suggests, The Independent (January 24, 2018), https://www.independent.co.uk/life-style/gadgets-and-tech/news/bitcoin-price-fall-criminals-blockchain-anonymous-cryptocurrency-zcash-monero-dash-a8174716.html.

[46] See Omarova, supra note 31 at 674.

[47] See Jordan & Hughes supra note 35 at 208.

[48] See generally Hester Pierce, The Financial Industry Regulatory Authority: Not Self-Regulation After All, in P. Iglesias-Rodríguez, ed., Building Responsive and Responsible Financial Regulators in the Aftermath of the Financial Crisis (1^st ed. 2015).

[49] See CFA Institute, Self-Regulation in Today’s Securities Markets: Outdated System or Work in Progress? (2007), 2.

[50] See Jordan & Hughes supra note 35 at 213.

[51] See Anthony D. Williams, An Economic Theory of Self-Regulation, Working Paper Prepared For The Political Economy Doctoral Workshop Department of Government, London School of Economics (January 2004), 18 (“When a group of firms decide to establish a self-regulatory regime they enter into an implicit contract. The contract effectively commits each participant to observe and obey the rules of the association. The problem is that the principal (in this case, the self-regulatory association) may not have perfect information about what type of agents (the industry participants) are voluntarily joining the self-regulatory regime, giving rise to the problem of adverse selection. Indeed, some firms may join to secure the insurance and signaling benefits of membership, but have no actual intention of following through with the commitments. Once an agent has joined, the principal may not have perfect information about whether or not the agent is actually following through with its contractual obligation, giving rise to a moral hazard.”)

[52] See Lydia Beyoud, Crypto Self-Regulatory Body Proves To Be No Easy Feat, Bloomberg BNA (May 16, 2018), https://www.bna.com/crypto-selfregulatory-body-n73014475994/.

[53] See Kevin W. Vonnahme, The Crypto Asset Class: Background and Securities Law Issues, MickLaw (May 1, 2018), http://www.micklawpc.com/documents/TheCryptoAssetClassBackgroundandSecuritiesLawIssuesWhitePaper.pdf

[54] See Joe Rennison, Call For US Treasury To Fill Cryptocurrency ‘regulatory vacuum’, Financial Times (March 15, 2018), https://www.ft.com/content/40ec2810-275c-11e8-b27e-cc62a39d57a0.

[55] Steven L. Schwarcz, Response, Financial Industry Self-Regulation: Aspiration and Reality, 159 U. Pa. L. Rev. Pen-Numbra 293, 296 (2011).

[56] See James Rundle, Seven Months Into His Term, and Brian Quintenz is Making Waves, WatersTechnology (16 February 2018), https://www.waterstechnology.com/industry-issues-initiatives/3504461/five-things-to-consider-about-crypto-sros.

[57] Id.

[58] Jonathan Macey & Caroline Novograd, Enforcing Self-Regulatory Organization’s Penalities And The Nature of Self-Regulation, 40 Hofstra L. Rev. 963, 966 (2012).

[59] Id. at 963.

[60] Id. at 965; see also Fiero v. Fin. Indus. Reg. Auth., Inc., 660 F.3d 569, 571-72, 574 (2d Cir. 2011).

[61] Id. at 966.

[62] See generally id. at 1001; see also John E. Calfee & Richard Craswell, Some Effects of Uncertainty on Compliance with Legal Standards, 70 Va. L. Rev. 965, 994-95 (1984).

[63] Other countries including Croatia, Japan, Switzerland, the United Kingdom and Slovenia have also considered self-regulatory initiatives for the cryptocurrency market.  See Shiraz Jagati, Croatia Launches Self-Regulating Blockchain Organization, Cryptoslate (February 21, 2018), https://cryptoslate.com/croatia-launches-self-regulating-blockchain-organization/.

[64] See Techwire Asia, Japan cryptocurrency industry sets up self regulatory body (February 18, 2018), http://techwireasia.com/2018/02/japans-cryptocurrency-industry-setting-self-regulatory-body/.

[65] See Nem Foundation, About the NEM Foundation, https://nem.io/about/foundation/ (last visited June 16, 2018).

[66] See Kenny Au, Tracing Back Stolen Cryptocurrency (XEM) From Japan’s Coincheck, Forbes (January 29, 2018), https://www.forbes.com/sites/outofasia/2018/01/29/tracing-back-stolen-cryptocurrency-xem-from-japans-coincheck/#9dcbfbf277eb.

[67] See Darren Pollock, Aims and Goals of Japan’s New Self-Regulatory Cryptocurrency Exchange Association, Cointelegraph (April 26, 2018), https://cointelegraph.com/news/aims-and-goals-of-japans-new-self-regulatory-cryptocurrency-exchange-association.

[68] See Chrisjan Pauw, Japan Issues Cryptocurrency Exchange Licenses, Cointelegraph (September 30, 2017), https://cointelegraph.com/news/japan-issues-cryptocurrency-exchange-licenses.

[69] See William Suberg, Japan Finally Gets Self-Regulatory Body for Cryptocurrency Exchanges, Cointelegraph (April 24, 2018), https://cointelegraph.com/news/japan-finally-gets-self-regulatory-body-for-cryptocurrency-exchanges.

[70] See Jai R. Massari, Annette L. Nazareth, Byron B. Rooney, Jeanine P. McGuinness, Zachary J. Zweihorn, Trevor I. Kiviat, Zachary B. Shapiro, Daniela Dekhtyar-McCarthy & Andrew Ruben, David Polk Blockchain Bulletin: A Cryptocurrency and DLT Newsletter, David Polk (March 20, 2018), https://www.finregreform.com/single-post/2018/03/20/davis-polk-blockchain-bulletin-cryptocurrency-dlt-newsletter/ (hereinafter “Davis Polk”)

[71] See Messari, https://messari.io (last visited June 15, 2018).

[72] Davis Polk, supra note 70.

[73] See ICO Governance Foundation, Self Regulatory Protocol For ICO Markets, https://icogovernance.org (last visited June 17, 2018).

[74] See Davis Polk, supra note 70.

[75] ICO Governance Foundation, supra note 73.

[76] See Tragedy Of The Commons, Investopedia, https://www.investopedia.com/terms/t/tragedy-of-the-commons.asp (last visited June 17, 2018) (“The tragedy of the commons is a very real economic issue where individuals tend to exploit shared resources so the demand greatly outweighs supply, and the resource becomes unavailable for the whole. Garrett Hardin, an evolutionary biologist by education, wrote a scientific paper titled “The Tragedy of the Commons” in the peer-reviewed journal Science in 1968. The paper addressed the growing concern of overpopulation, and Hardin used an example of grazing land when describing the adverse effects of overpopulation.”)

[77] See generally Ryan Selkis, A Token To Self-Regulate Tokens, Medium (February 21, 2018), https://medium.com/@twobitidiot/a-token-to-self-regulate-tokens-but-really-a61da77e6a7b.

[78] Id.

[79] Id.

[80] See Larsen, supra note 29.

[81] See Beyoud, supra note 52.

[82] Id.

[83] See CFA Institute, supra note 49 at 21.

[84] See generally Macey & Novograd, supra note 58 at 1002-1003.

[85] Id.

[86] See Omarova supra note 31 at 673.